Credit Connect

The latest results Insolvency statistics from The Insolvency Service for Quarter 2 (April to June 2017 (Q2 2017) reveal that total company insolvencies increased in Q2 2017, primarily caused by 1,131 connected personal service companies entering liquidation on the same date following changes to claimable expenses rules. The estimated underlying number of company insolvencies fell to the lowest quarterly level since comparable records began in 2000.

Commenting on statistics Adrian Hyde, president of insolvency and restructuring trade body R3 said “Once you strip out another one-off wave of liquidated personal service companies linked to tax changes, a recent run of quarterly increases in underlying insolvency numbers has been checked back sharply.

“The figures are pretty surprising given insolvency practitioners have been reporting a tougher time for businesses in 2017. The unexpected drop in inflation last month is one hint that things may have eased up for businesses since the end of 2016, and while the Bank of England has been warning about rising consumer debts, businesses will still be benefitting from debt-fuelled spending in the short-term at least.”

“There are other factors to consider, which may explain the sharp underlying drop, including the introduction of new insolvency Rules in April. Some formal insolvency processes may be being delayed while creditors, debtors, and others get used to the new decision-making procedures.”

“As ever, it’s important not to read too much into a sudden change in one quarter. Prior to this quarter, insolvencies had been rising more consistently than they have done since just after the financial crisis and there are still lots of warning signs for businesses out there. Higher inflation means higher input prices for businesses on the one hand and squeezed disposable incomes for consumers on the other. Added to this mix is wavering consumer confidence, while the election outcome and Brexit negotiations may cause uncertainty for businesses, too.”

“On top of all this, businesses have had some significant increases in fixed costs over the last year. The pound’s travails have raised some import prices, while the 2016 introduction of the national living wage means the minimum wage is now £1 higher than it was in 2015. Some businesses have seen their business rates increase, while more and more businesses have had to comply with pension auto-enrolment. Although the economy is growing, it will need to grow fast enough to balance these factors out.

“If this recent decrease turns out to be a blip in an upward trend, it would be a warning sign for the wider UK economy, especially as businesses continue to enjoy some key advantages: interest rates remain at record lows, while creditor forbearance among traditional sources of business finance, like banks and trade creditors, is still much higher than it was before the financial crisis.

“Recent research by R3 found that nearly 80,000 UK businesses would be unable to repay their debts if interest rates were to rise by a small amount. Many firms have limited room for financial manoeuvre.”

Ana Boata, European Economist at Euler Hermes, the world’s leading trade credit insurer, said: “Business insolvencies have been on the rise for three consecutive quarters, (up 3.6% in Q1 2017) after 17 consecutive quarters of falls.”

“We expect the level of UK insolvencies to rise by 5% in 2017 and 6% in 2018. The main culprits are the predicted slowdown in GDP growth (to 1.4% in 2017) as consumers stop providing the cushion for the economy, while investment opportunities are increasingly impacted by Brexit. In addition, pressures on margins in the context of high indebtedness are adding additional burden on companies.”